UK consults on controversial royalties withholding tax aimed at foreign digital multinationals

The UK is seeking feedback on the design of a new tax measure, announced in the November UK budget, aimed at multinational firms in the digital sector that sell goods and services into the UK that are able to achieve artificially low worldwide effective tax rates through related-party royalty payments.

Such low rates are a distortion to competition in the markets in which MNEs operate, including the UK, the government said in its consultation.

The proposal would subject to UK withholding tax a royalty payment made to a related or connected nonresident company located in a low tax jurisdiction where the royalty payment is made to exploit intellectual or other rights in the UK.

The tax would apply to royalty payments that are not currently subject to UK taxation because the payment does not have a source in the UK, was not made by a UK resident entity, and was not made in connection with a permanent establishment (PE) or avoided PE in the UK. The tax would be accomplished by changing the source rules for withholding tax to cover payments made for exploitation of IP or certain other rights in the UK

The tax liability will only apply where payment is made to a jurisdiction where the UK does not have a tax treaty with a non-discrimination clause so it will not violate the UK’s international commitments and will mostly reach payments made to low or no tax tax regimes, the consultation said.

The changes are proposed to have effect from April 2019.

The consultation, released December 1, will run through February 23.

 

 


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